Subheading: What are the differences between a merchant processor and a PayFac? And which one is the right one for your business?
The world of payment processing is a lot more complicated than it really should be sometimes. For such a crucial element for enabling merchants to sell online, you’d think that the solution would be easier to come by. But the reality is that it can be quite complicated.
A lot of the complexity comes from all the different services available, as well as finding the one most suitable for your business — which, as you might imagine, is really hard to do when you’re just starting out!
If you’re a newly christened small business owner, some of the services you may hear about are Payment Facilitators (PayFacs) and Merchant Processors. Both are services that enable you to accept payments from your customers.
BUT they are definitely not the same thing. So, what’s the deal?
How are they different? And why does it matter which one you choose to go with?
Learn more below as we breakdown their differences with the help of the payments expert, Jed Morley (founder and CEO of Platinum Payment Systems):
Payment Processing | OVERVIEW
Now, before we look into the details, let’s first get a wider-scope view on payment processing. For this, we’ve broken down all the main parties involved during an online payment transaction:
- Merchant: A given, but the merchant is the one that accepts the payments.
- Buyer: Or, the cardholder, from whom the funds of the transaction are taken from.
- Issuing Bank: The bank that issued the credit card to your buyer.
- Acquiring Bank: The bank that processes the payment and delivers it to the merchant.
Knowing this, we can now paint a clearer picture of the coming and goings of both merchant processors and PayFacs — which is what we’re going to go into next!
Merchant Processor vs. PayFac | Important Differences
The differences we’re going to be covering today between merchant processors and PayFacs were taken directly from Jed Morley’s educational video (posted on his LinkedIn Account, about this exact subject):
Payment Facilitators (PayFacs)
PayFacs were created to fill the need for a more streamlined solution for small to medium-sized businesses to accept online payments.
The key to understanding them is in the name. Payment Facilitators, facilitate payments — they make things easier, simpler. This is an important distinction, as they don’t actually process payments in the same way as merchant processors do.
Instead, PayFacs work directly with acquiring banks and payment processors, to help businesses by signing them up as submerchants on their own merchant account.
What they offer to merchants is a highly simplified payment processing solution. They do everything for the sub-merchant, from underwriting to onboarding, and monitoring, so that they don’t have to worry about early setup.
What could take merchants days or weeks spent signing a contract with an acquiring bank is accomplished pretty much instantaneously with a PayFac — hence why they’ve become so popular, especially with smaller businesses.
However, and this is a pretty big red flag here, this streamlined setup process come with its risks. As, according to Jed Morley, the reason why the setup is so easy with PayFacs is that “PayFacs don’t do the full underwriting. They gather little bits and pieces of data, start pinging it off to the database, and wait on underwriting it — doing it only once your business actually starts seeing volume or if you have an issue.”
Jed goes on to say that, “If you’re an online retailer or in direct sales or doing a lot of marketing, if you don’t set it up right in the beginning, if you don’t underwrite things correctly, you’re really just hurting your business’s opportunities for long-term growth.”
Merchant Processors | Payment Platinum Systems
Again, the key to understanding merchant processors is in the name. They’re the ones that receive the requests for payment authorization from the customer and they’re the ones that send that request to the relevant card network so that it can be approved. They’re also the ones that send back the response of the authorization to the merchant.
And, at the end of the day, all the funds that are collected from the cardholders’ banks are sent to the merchant’s bank account by them.
Processors are the ‘middle-men’ in all this. And much like PayFacs, you can approach them directly if you’re interested in selling goods or services online.
The difference between them lies in the type of service that they provide. PayFacs are all about the fast life, while merchant processors like Platinum Payment Systems are more interested in setting you up for long-term success.
The benefit there is, of course, the fact that all your setup is done properly. But, also, instead of being onboarded by these big, nameless, faceless entities, you get a partner in all this that you can call when you need someone to talk to, that will understand the type of business that you have and know how best to handle your transactions.